With the easing of inflationary pressure, the Reserve Bank of India (RBI) may cut interest rates on Tuesday for the third time this year which would allow the central bank to relax credit off take expected to help the struggling economy.
An independent poll showed that most economists are hopeful that the RBI would cut the repo lending rate by 0.25% to 7.25% which was lowered by the same amount in January and March this year.
An interest rate cut have to be accompanied by steps to boost liquidity as tight cash flow is preventing bankers from lowering their lending rates.
But there are other concerns like deficit monsoon and the uncertainty over the US Federal Reserve’s move to raise interest rates which will make RBI to take measured action.
Moreover, the rate cuts are dependent on government’s action to implement reform measures to speed up growth. “We expect the RBI to cut the repo rate by 25 basis points, but the tone of the statement will be cautious on the inflation trajectory,” said Soumya Kanti Ghosh, State Bank of India’s chief economic adviser.
After the rates were held steady at the last policy review in early April, consumer price inflation has eased to a four-month low of 4.87%, in line with the RBI’s mid-term targets. Analysts argue inflation data should give the RBI enough room to cut rates again and reverse the three rate hikes delivered by governor Raghuram Rajan from September 2013 to January 2014 when India was suffering from double-digit inflation.
The economists feel bolstering growth should become the bigger imperative given the poor corporate earnings, weak industrial activity, and an elusive recovery in bank credit. India’s economy grew 7.5% in the January-March quarter from a year earlier — faster than China’s 7% expansion — but economists have raised questions about the accuracy of a new method to measure economic activity.
Further rate cuts would put India in a similar monetary path to China, which earlier this month cut interest rates for the third time in six months. Bankers are also lobbying for smaller measures to free up cash in the financial system, including easing the amount of funds that must be locked up at the RBI every day.
Rajan has expressed unhappiness that banks are yet to substantially cut their lending rates thus affecting the transmission of monetary policy.